Monday, August 08, 2011

Act III, Scene Two

In which a doomed central bank pluckily sallies forth and buys all the bonds that others won't.

The Germans are all like, "Reicht das?", and indeed it won't suffice. The theory behind this is that the ECB is stepping in to cover the interval before the various countries can authorize bond purchases by the EFSF. However that fund is too small currently to cover Italy, and the other problem is that now we are into buying bonds of countries that are guarantors of the EFSF. This becomes increasingly implausible as the amounts rise. Because if it really comes down to Germany and a few other countries, then their implicit debt from the guaranty can only rise so much before it becomes a threat to their credit ratings. This is why the Bundesbank has been wandering around humming Wagner for months.

The other ECB move is to dump out all the money banks need - interbank lending being quite impaired. While this works in the short run, it doesn't necessarily help funding impairments in the real economy, does it? And that's the other side of of Act III, Scene Two.

The US is partly in the bag on the EFSF because IMF threw in some dough. Now, in recognition of the fact that it is really the Germans who are providing the stability part of the EFSF, the German Debt Management office gets to give every EFSF move the thumbs up or thumbs down. So this is proceeding to Scene III, which is going to be a a tension-filled chase scene. Either the Germans sink their own credit or the ECB gets effectively broken.

The official story is still that the Italian problem is just "contagion", but that is not true. The financial weakness Italy is experiencing makes it extremely problematic that it will be able to continue to hold its debt ratio. The Italians could do it if you just wrote off about 20% or if you gave them about 2% as an average rate. That is a huge bailout and it is impossible for Germany to cover it.

"For the Aaa rating to remain in place, we would look for further measures that would result in the ratio of federal government debt to GDP, for example, peaking not far above the projected 2012 level of near 75 percent by the middle of the decade and then declining over the longer term," Moody's analyst Steven Hess wrote in a report.

"Last week's agreement suggests that coming to an agreement that would meet this criterion by early 2013 will be challenging, given the political polarization, but not necessarily impossible."

They could have just issued a statement "What S&P said". This was necessary because WS opinion was rapidly centering on the S&P as villain meme in an utterly ridiculous way:

Standard & Poor’s, the rating company that downgraded the debt of the United States to AA+ from AAA for the first time, now finds itself assailed by investors led by billionaire Warren Buffett for making a political decision that has more to do with Tea Party politics than the financial stability of the U.S.

What BS. In the 1990s in the US media and popular culture, it was never disputed that we could not cover SS & Medicare retirement payments for the boomer retirees. Never. It was common knowledge that "something would have to be done". Remember the first poll that found more Americans believed in UFOs than the financial stability of our retirement system?

It was only as we got close to the time when something would have to be done that suddenly the meme changed and politicians were running around saying differently.

The really funny thing is that if you are interested in getting those retirement benefits, your self-interest demands that the US sharply change its fiscal course. So it is the Tea Party people who mostly want to maintain basic social programs. The average progressive seems to be of limited individual deployed intelligence; they are being manipulated by political spin organizations that are only looking at the next election.

The oddest artifact of the current crunch is that the French are running around praising the USD to the sky; that is because everyone believes that they are next in line for the downgrade.

In any case, the European crisis will continue until the Europeans decide to stop rolling bad loans (rolling unpayable amounts into ever-larger principal balances).

The US has to confront its own fiscal problems.

The Chinese have an increasingly worrisome difficulty with their real economy, and it's because of declining margins and high inflation. They are going to struggle to stop the bleeding over the next year. The business problems cited in the article are going to be partly assisted and partly aggravated by the necessary yuan appreciation, which hurts pricing for export companies.

Therefore, oil will continue to drop until it goes low enough to stop the bleeding in portions of the world's real economy. I really cannot say how low it WILL go. There will be bounces along the way, but in comparison to 2008, this round of the great debt game appears more serious.

Among the generation currently aged 35-to-50, Social Security has always been nothing more than a laugh line, at least in my experience. And that cuts across the entire political spectrum from red-diaper babies to KKK fascists (and I do mean that literally). Forget what people say on the internet, it's the blank look and guffaw you get from a passing mention of SS, even from self-described Progressives. The next generation younger reacts pretty much the same way.

Facebook is passing around something from Move.on stating that the credit downgrade and the jobs report are the fault of the Tea Party. I stopped being a Democrat because I was tired of the same old lies, but apparently some folks will believe anything.

Watched Obama's speech. It was wrong on just about every point.Denigrated S&P, blamed the TEA party, then suggested more government spending. Nothing about any actions to get the economy moving. No drilling, mining, logging, manufacturing, nuclear energy, free trade, or anything that would actually create some jobs. The price of gold rose and the indexes went down as he spoke. Too bad he wasn't watching the markets reaction to the speech. He might, just might get a clue as to how bad his policies really are.

He is an economic illiterate!! But we knew that. What next? Can Congress finally get together and craft some pro-business policies and make some real cuts in spending? Will the dems get on board? Or is it going to be more posturing and keynesian pipe dreams?

I suppose the Bernank will announce QE-3 and all will be well. Except I need to run out and buy a wheelbarrow to cart around my dollars. Gold and Swiss Francs - I wish I hadn't sold out on Thursday. May be time to get back in. With Congress out of session and the boy-king philosopher in charge, the fear of inflation may go run amok.

As to QE3, it's not clear to me that the Fed can do it effectively. The Fed has to wait.

Think about it - a big chunk of that money went into commodities. Now a lot of money is sitting in banks. Are people going to suddenly start buying oil before it gets to the floor? I don't think so.

And think of what they are fighting. Go back and look at that deposits graph - and that was just other deposits! Close to 400 billion in a few months - what kind of a buying program would the Fed have to float to fight that?

The ECB is talking about 1.2 trillion in USD in bond purchases. It isn't stopping the slide of the DAX! When investors start worrying about fundamentals, such programs are not hugely effective.

My point was not that it would be a good idea, but rather that they might think it would be a good idea. I'm no economist, but have been around long enough to know that pushing on a string (putting money in the system with no place for it ot go except commodities) doesn't work very well.........Unless you're a commodities trader.

I'm with Jimmy. The Benbernank, last time I checked, still thinks that he can prevent deflation by force-feeding dollars into the system. I'm not entirely cynical about the man--I'd like to think he's evaluating things as he goes along and learning from his mistakes, so maybe QE3 won't come or they'll find a really tricky way of actually making it stick. But realistically I'd say they're going to come on in the same old way and get beaten in the same old way.

As a trade, though, I won't touch metals until the miners stop crashing and the dollar stops rising.

Investing in metals right now(especially gold and silver) is a form of high stakes gambling; one is betting on one's ability to be the first out of the market when the fear bubble pops. When we reach the calm of the depression, then gold and silver will plummet.